Fewer rate cuts in 2025: Should you delay any big borrowing plans?

Dubai: After rising interest rates made borrowing increasingly expensive over the past couple of years, UAE residents were hoping for loans to become much more affordable with multiple interest rate cuts this year and next. However, the wait is likely to be longer.

The world’s top economy, the US, on Wednesday, cut interest rates for the third straight month, with central banks like the UAE also following suit. However, US officials lowered their forecast to just two interest rate cuts next year from four cuts seen in September, jolting investors and markets worldwide.

With the US policymakers now more inclined to pencil in just two rate cuts next year, down from the three cuts recorded this year, how would this affect you and your plans to take on loans this year? You may have to now postpone your plans, experts flag.

How higher interest rates affected borrowing demand

“Higher interest rates in recent years have clearly affected spending on a global level because the cost of borrowing money went up,” said Brody Dunn, an investment manager at a UAE-based asset advisory. “So, if you have any type of credit card or loan, you end up paying more for the money you borrowed.

“This is why potential borrowers become more hesitant to borrow money because of the higher cost. Also, with interest rates not seeing huge dips this year, it didn’t get a whole lot easier to borrow money even as there was a definite marked improvement in rates.

“The only saving grace for borrowers would be: the more the number of rate cuts, the more borrowing costs will drop. With lesser interest rate cuts planned for next year, the trickledown effect leading to cheaper loans diminishes, meaning loans will stay costly for longer.”

How soaring inflation resulted in multiple rate hikes

For economies worldwide, there has been a prevalent threat of inflation re-accelerating and requiring even more of such drastic rate hikes in the future, if central banks don’t keep reining in a surge in prices by making it more expensive for businesses and people to borrow money.

“Making debt more expensive is an intended consequence of tightening monetary policy to contain inflation,” explained Abbud Sharif, a banking industry analyst based in Dubai. “The good news now is inflation has slowed - suggesting the world economy is playing out the way central banks had hoped.

“The risk, however, is borrowers might be in precarious positions financially. Higher interest rates could amplify these fragilities, leading to a surge of defaults, and with the cost of repayments rising for you, lenders want to ensure that they are lending to those who can handle higher rates.”

Borrowing rates still high, wait till 2026 to benefit

Higher interest rates mean it’s more expensive to borrow money, which slows or delays big purchases, lower rates encourage borrowing and tend to increase money supply in the market. For example, the lower the interest rate the lower the mortgage payments on a newly purchased house.

“As interest rates are peaking now and start to drop later this year, if you’ve been considering a large financial decision now, such as buying a house or purchasing a car, consider postponing plans until you get favorable loan terms towards the start of 2026,” Sharif added.

“Also, credit cards with variable rates tend to drop when the rates start to slow. So, if you’re trying to catch up on credit card debt, this can be of some help. If you already have a loan, lower interest rates might mean it is a good time to evaluate your current terms and consider refinancing it.”

How to benefit from three interest rate cuts in 2024?

“Only a few investments stand to benefit when interest rates start to go down, compared to when they are paused or continue at existing levels,” added Dunn. “For instance, your bond investments give good returns in a high-rate environment.

“When it comes your investments in stocks, high interest rates tend to make stocks more attractive to investors, as they can generate higher returns than fixed-income investments. This can lead to a rise in stock prices, which can result in higher returns for those who have invested in stocks.”

Dunn reiterated that lower rates also incentivise borrowing, so as businesses make more investments in their business, their stock prices tend to rise again. “So depending on where you invest, lower or higher interest rates could affect you positively or negatively,” he added.

Bottom line

While increasing rates made borrowing more costly and reigns in spending in favor of saving, looming lower interest rates will make borrowing cheaper – allowing people to borrow more freely. As rate hikes are expected drop further by the end of next year, borrowing and spending will rise in tandem.

“While borrowing may provide better terms when interest rates are low, it’s still wise to be cautious. In contrast, some areas that could offer lower rates of return when interest rates go down include savings accounts, deposits, bonds, and money market accounts,” added Sharif.

“When choosing to borrow now or early 2025, choose your interest rates based on the loan’s term. If it’s a smaller amount, factor in no immediate rate cuts, so a fixed rate might be better. If you're comfortable with risk and expect more reductions than currently forecasted, a variable rate could save you money.”

However, realistically, financial planners often reiterate that for most people, if you have an established savings plan and financial goals, a lower interest rate will most likely not be a significant reason to materially change your saving strategy.